Congress’ recent move to raise the debt ceiling is a welcome reprieve, but the issue is expected to resurface in early December.
During the recent debate, Treasury Secretary Janet Yellen highlighted some of the potential consequences of not raising the debt ceiling. If Treasury could no longer borrow and the cash balance was insufficient for the government to pay its bills, Yellen testified, “Nearly 50 million seniors could stop receiving Social Security payments or receive them delayed.”
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That puts the whole issue on my path.
Before I get into the mechanics, I want to make two comments, both of a political nature.
First, the debt limit is a foolish provision and should be abolished. It offers no tax discipline; those decisions are made the moment a spending or tax change is initiated. Instead, the debt limit has been repeatedly used to force a crisis and make concessions.
Second, whatever the mechanisms are regarding the debt ceiling and Social Security benefits, I bet Congress will find a way to make sure Social Security checks are done on time.
During the debt crisis in 1996, when the Treasury Department announced it did not have enough money to pay the March distributions, Congress allowed the Treasury Department to issue enough debt to make the payments by not counting those loans. counting towards the debt limit.
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As for the mechanics, it is not enough to say that Social Security has its own source of funding and therefore would not be affected by the debt limit.
Even if Social Security takes in enough money each year — through payroll taxes and the taxation of Social Security benefits under the federal income tax — to cover promised benefits, the finances are closely tied to treasury transactions.
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Under normal procedures, Social Security income is immediately credited to the Social Security trust fund in the form of short-term, non-marketable Treasury bills called debt securities (CIs). The income itself remains in the General Fund, from which the Treasury pays a monthly distribution. When Treasury pays the benefits, it cashes out some of the CIs. If the Treasury does not have enough cash on hand (for example, because it has used the money to pay other non-Social Security bills) and cannot issue new debt due to the debt ceiling, Social Security benefits may be deferred.
In addition, as you know, Social Security currently has a cash deficit every year. That is, the tax revenue is less than 100% of the promised benefits (see Figure 1).
That gap between income and expenditure is currently being filled by interest on the trust fund and, starting this year, by drawing on trust fund assets. If the Treasury is out of cash and reaches the debt ceiling, it will not be able to pay the interest on the trust fund’s special issuance obligations, nor will it be able to repay the obligations.
So yes, the Social Security program has the combination of income tax revenues and assets in the trust fund to cover all distributions through 2034 (and about three-quarters of the promised benefits after that), but to make those payments on time, the Treasury must have the money — or have access to cash by borrowing – to make those payments from the Community Chest. If the debt cap prevents the Treasury from issuing new debt to manage cash flow or to redeem trust fund assets, distributions will not be paid on time.
Most likely, all that technical stuff won’t matter. No congressman wants to be responsible for millions and millions of people who don’t get their Social Security checks. So even if all hell breaks loose, Congress will almost certainly pass legislation to make sure Social Security checks are done on time.